Crude Language

Crude language.  Stocks climbed yesterday on troubles in the Gulf and gaining hopes for a Fed rate cut.  It was another twisted case of bad is good as stocks climbed on news of two tankers being torpedoed at the mouth of the Persian Gulf sending energy shares higher yesterday.

MY TWO CENTS

1.  Tariffs hurt… everyone. By now you have heard it by almost everyone in the media along with countless admissions in this note that tariffs are bad.  Why?  Because tariffs and trade wars hurt not only the intended targets but also those who hope to benefit from the conflict.  More specifically,  the Chinese economy has slowed in response to the trade war which is having global impact.  While on the surface, it may appear that the tariffs are doing exactly as intended, one needs to simply widen out their perspective to see that demand for industrial products by the world’s second largest economy has fallen bringing down prices and profitability globally.  An example is crude oil prices which have been affected by a reduction in demand by China, which is the second largest global consumer of the commodity.  Chinese produced exports which are tariffed experience price increases to cover the tax which ultimately is paid by US consumers once importers can no longer eat the increased costs.  The counter measures hurt too.  US farmers who export to China have experienced massive declines in revenues and technology companies are beginning to feel the pain as well.  Last night, WHILE YOU COMMUTED, Broadcom announced earnings and cut its full year guidance below the lowest estimate citing the trade war with China.  Broadcom is down -8.7% in the pre-market along with other semiconductor shares following the slide.

2.  The bond market is talking… please listen.  Bond traders are closing in on the Fed keeping longer rates pegged at the low end of their yield range.  Bond traders pay close attention to the economic numbers and when they suspect weakness, they move in quickly.  Yesterday’s weekly Initial Jobless Claims number may not appear noteworthy, but a close look at their trend shows that they have been rising subtly and bonds traded up in yesterday’s session.  When bond investors expect weak economic conditions, lower rates, and lower inflation they buy bonds pushing down yields.  The Fed will meet next week to discuss rate policy and though the FOMC is not expected to cut rates in this meeting, there is now a 91% chance for a cut in July’s meeting, according to Fed funds futures.

THE MARKETS

Stocks advanced yesterday in response to increased tensions in the Gulf which caused beleaguered energy shares to rally.  The increased pain also gave traders who are hopeful for a rate cut more justification.  Stocks resumed their June rally with the S&P500 rallying by +0.41%, the Dow Jones Industrial Average climbing by +0.39%, the Russell 2000 advancing by +1.05%, and the NASDAQ 1000 trading up by +0.51%.  Bonds rallied on weak economic data and 10-year treasury yields fell by -3 basis points to 2.09%.  Crude oil climbed by +2.23% in response to the sabotaged tankers but remains in a very weak technical position just above key supports levels and sinking demand combined with increased supplies will continue to dominate its trajectory.

WHAT’S NXT

- The Census Bureau will release Retail Sales for May and they are expected to have increased by +0.6% month over month compared to last month's decline of -0.2%.

- The Fed’s Industrial Production is expected to show a month over month growth of +0.2% compared to a decline of -0.5% in the prior period.

- The University of Michigan’s preliminary read of June Sentiment is expected to show a decline to 98.0 from last month’s 100.0.

- Next week will feature housing numbers, manufacturing, Leading Indicators, and a highly anticipated FOMC meeting.

daily chartbook 2019-06-14